Farmers have the option to form their business as a limited liability company, an entity that offers liability protection to the farmer’s personal assets. Filing is fairly easy after you learn a few key words in the Articles of Organization.
What’s the situation?
We have a friend named Espen. Espen has years of intern experience on all the local farms, plus enough savings to make it through the first season, so he’s starting his own farm. Since he’s been reading these blog posts and recognizes the risks of a sole proprietorship, Espen is looking at an LLC (Limited Liability Company) to protect his personal assets. So how does he set up one of those?
Where does the law come in?
Espen forms an LLC by filing “articles of organization” with the state agency responsible for such documents. Usually that duty is assigned to the Secretary of State’s office. The specific requirements of an LLC are described in each state’s laws. Although forms are generally self-explanatory, they do have a few key words you should know.
First, I’ve got an opinion to express: I think the name “articles of organization” is one good example of those elaborate, sometimes useless, formalities that many people associate with lawyers and legal stuff. “Articles of organization” sound like a far more elaborate document than it actually is. In my humble opinion, articles of organization should really be called an “LLC Registration Form.” Then we’d all know what it is! But, until then, please bear with me.
Filing articles of organization is a pretty simple process. Many states have form articles of organization available on their websites. Lets go back to Espen: First, he should check his state’s Secretary of State office for a form. If he comes up empty handed, he should go down to the local library ask the librarians. If they don’t have a form on file, they certainly know where to download one. Espen’s form should be specific to his state, because the articles should follow the requirements of his state’s laws.
After checking out the form, the first thing Espen is probably going to do is write in his business name. Sounds easy, right? Well, there are a few things to think about. First, most states will require that the business name describe it’s LLC status. So Espen will need to write in “Puddle Duck Farm, LLC”. He should also be careful about using names that are commonly reserved for other businesses. Generally, if you aren’t a bank, you can’t have any words in your name that suggest a bank, such as “deposit” or “trust.” The same goes for words like “architecture” or “engineer.” This isn’t a problem for Espen, fortunately, but it can dampen the creative spirit of some farmers. Espen will also include himself as a member of the LLC, along with his business partners or investors who wish to be members. All states will allow LLCs with only one member, so Espen may fly solo as well.
Next the form will probably ask Espen if Puddle Duck Farm is “member managed” or “manager managed.” What’s that? Well, first lets start with what “managed” is. (Here we go again with the unintuitive legalese!) Contrary to what the name sounds like, this question does not ask if a manager “manages” the farm. It asks: “Who has the authority to enter into commitments on behalf of the farm?” There’s a big difference. Espen might own the farm and hire a manager. That doesn’t make the business manager-managed. Espen still maintains the authority to commit the farm, legally. For example, Espen’s manager couldn’t sign lease papers or take out a mortgage on the property because he can’t commit the farm, legally.
Let’s say Espen is going into business with his mother. She has a great head for business and she’s willing to invest in Espen’s farm. Mom can be included as a member of the LLC to establish her involvement and share of the profits. If Mom is made a member and Espen chooses “member management,” then both Espen and Mom can make commitments for Puddle Duck Farm. Of course, Mom might not want that responsibility. Then, Espen would choose “manager managed” and write in himself as the manager. Mom might still receive some of the profits, but she wouldn’t be making commitments for the farm.
Many people like the LLC because it allows the owners more flexibility than a corporation provides (more on that later). The example of Mom and Espen illustrates how you can arrange an LLC to meet different goals. On the downside, it’s not so simple to explain all of these options when the law offers such annoying titles as “manager-managed”!
There’s always a few more things to fill out like mailing addresses and agents, but the articles of organization are generally pretty short. Don’t hesitate to ask at your public library or state law school library for help understanding the different options. Next time, we’ll talk about the more appropriately named “operating agreement.” This document outlines how Espen’s LLC will be operated, and it’s an important document for any farmer with an LLC.